Fortnightly - Lehman Brothershttp://www.fortnightly.com/tags/lehman-brothers
enFive Years Laterhttp://www.fortnightly.com/fortnightly/2013/10/five-years-later
<div class="field field-name-field-import-deck field-type-text-long field-label-inline clearfix"><div class="field-label">Deck:&nbsp;</div><div class="field-items"><div class="field-item even"><p>Wall Street is back in business. What’s next for utility finance?</p>
</div></div></div><div class="field field-name-field-import-byline field-type-text-long field-label-inline clearfix"><div class="field-label">Byline:&nbsp;</div><div class="field-items"><div class="field-item even"><p class="p1">Michael T. Burr</p>
</div></div></div><div class="field field-name-field-import-bio field-type-text-long field-label-inline clearfix"><div class="field-label">Author Bio:&nbsp;</div><div class="field-items"><div class="field-item even"><p class="p1"><b>Michael T. Burr</b> is <span class="s1"><i>Fortnightly’s</i></span> editor-in-chief. Email him at <a href="mailto:burr@pur.com">burr@pur.com</a></p>
</div></div></div><div class="field field-name-field-import-volume field-type-node-reference field-label-inline clearfix"><div class="field-label">Magazine Volume:&nbsp;</div><div class="field-items"><div class="field-item even">Fortnightly Magazine - October 2013</div></div></div><div class="field field-name-field-import-image field-type-image field-label-above"><div class="field-label">Image:&nbsp;</div><div class="field-items"><div class="field-item even"><img src="http://www.fortnightly.com/sites/default/files/1310-FEA1-fig1.jpg" width="1022" height="1025" alt="Figure 1 - Big Build and the Great Recession" title="Figure 1 - Big Build and the Great Recession" /></div><div class="field-item odd"><img src="http://www.fortnightly.com/sites/default/files/1310-FEA1-Napolitano.jpg" width="1002" height="849" alt="&quot;Capital markets are vibrant and healthy. It feels like the end of a five-year cycle of fear and distress.&quot; - Frank Napolitano, RBC Capital Markets" title="&quot;Capital markets are vibrant and healthy. It feels like the end of a five-year cycle of fear and distress.&quot; - Frank Napolitano, RBC Capital Markets" /></div><div class="field-item even"><img src="http://www.fortnightly.com/sites/default/files/1310-FEA1-fig2.jpg" width="1026" height="907" alt="Figure 2 - Power &amp; Gas Debt Issues" title="Figure 2 - Power &amp; Gas Debt Issues" /></div><div class="field-item odd"><img src="http://www.fortnightly.com/sites/default/files/1310-FEA1-Bilicic.jpg" width="1002" height="841" alt="&quot;There’s a sense that regulators are suffering from rate-filing fatigue, and rate proceedings will become more difficult.&quot; - George Billicic, Lazard" title="&quot;There’s a sense that regulators are suffering from rate-filing fatigue, and rate proceedings will become more difficult.&quot; - George Billicic, Lazard" /></div><div class="field-item even"><img src="http://www.fortnightly.com/sites/default/files/1310-FEA1-fig3.jpg" width="2056" height="783" alt="Figure 3 - Major Power Asset Acquisitions" title="Figure 3 - Major Power Asset Acquisitions" /></div><div class="field-item odd"><img src="http://www.fortnightly.com/sites/default/files/1310-FEA1-Kind.jpg" width="1002" height="841" alt="&quot;If a company will sell assets in this market, it’s not because they think they’ll get good proceeds.&quot; - Peter Kind, Energy Infrastructure Advocates" title="&quot;If a company will sell assets in this market, it’s not because they think they’ll get good proceeds.&quot; - Peter Kind, Energy Infrastructure Advocates" /></div><div class="field-item even"><img src="http://www.fortnightly.com/sites/default/files/1310-FEA1-Nastro.jpg" width="1006" height="851" alt="&quot;Investors will start differentiating utilities by regulatory compact.&quot; - David Nastro, Morgan Stanley" title="&quot;Investors will start differentiating utilities by regulatory compact.&quot; - David Nastro, Morgan Stanley" /></div></div></div><div class="field field-name-body field-type-text-with-summary field-label-hidden"><div class="field-items"><div class="field-item even"><p>When the storied investment bank Lehman Brothers declared bankruptcy on Sept. 15, 2008, it marked the official beginning of the worst financial crisis in recent history.</p>
<p>The fact is, however, that by the time Lehman went bankrupt, a crisis already had been brewing for at least 18 months. The subprime lending meltdown began in early 2007, when median home sales prices in the United States began sharply declining from their January peak. By the end of 2007, the subprime mortgage crisis was looking like a debt crisis generally, and we were already talking about a recession and its possible effect on utilities. </p>
<p>Specifically, in our October 2007 financial report, we wrote: “the industry’s financial health arguably has nowhere to go but downward in the months and years to come. </p>
<p>“Utility companies are bringing monumental capital expenditure plans before rate regulators just as they’re dealing with a barrage of rising costs – for fuel and other commodities, as well as labor, pension-fund obligations, and interest payments. Additionally, with the threat of greenhouse-gas (GHG) regulation looming in the 2009 to 2013 time frame, utilities face unpredictable environmental-compliance costs. </p>
<p>“Many utility companies and their investors expect regulators will support utilities’ capital requirements with progressive rate structures, including accelerated rate-recovery for cap-ex spending. But as costs escalate, utilities’ rate demands seem certain to test the limits of regulators’ support.” (<i>See “</i><a href="http://www.fortnightly.com/fortnightly/2007/10/2007-finance-roundtable-pricing-regulatory-risk" target="_blank"><i>2007 Finance Roundtable: Pricing Regulatory Risk</i></a><i><a href="http://www.fortnightly.com/fortnightly/2007/10/2007-finance-roundtable-pricing-regulatory-risk" target="_blank">,</a>”</i> <i>October 2007.</i>) </p>
<p>Those predictions – a full year before the official start of the financial crisis – were mostly accurate. But as it turns out, we missed some things. For one thing, we didn’t predict that the debt markets would actually freeze up in the depths of the crisis. We didn’t imagine the financial meltdown would pull down Lehman Brothers, and drag some other banks so close to the brink that Congress would step in with the $700 billion Wall Street bailout. And we didn’t know that the ensuing economic decline would get its very own proper noun: the Great Recession.</p>
<p>Moreover, we didn’t know that natural gas prices would plunge and stay down in the low single digits per million Btu, driven by a slow economy and a boom in shale development. We did guess that interest rates would decline, but we didn’t understand just how far the Federal Reserve would go to pump money into the economy. As Treasury rates flirted with the number zero, utilities began refinancing their bonds to free up cash flow. Then, Congress passed an economic stimulus bill that provided bonus depreciation for capital investments, which in many cases allowed utilities to invest without raising much debt or equity capital. </p>
<p>These factors brought remarkable results in the electric and gas industry. Utilities plowed money into infrastructure all through the Great Recession (<i>see Figure 1</i>) – a trend that we actually did predict in October 2008, as we saw investment costs declining and policy changes on the way. “[S]ome companies might accelerate their investments, taking advantage of falling prices for building materials and labor, and an increase of available contractors in a slowing industrial market. Plus, if political winds continue blowing in their current direction, the industry might benefit from a wave of financial incentives for capital investments and energy technology development and demonstration.” (<i>See “</i><a href="http://www.fortnightly.com/fortnightly/2008/10/path-forward"><i>The Path Forward</i></a><i>,”</i> <i>October 2008.</i>) </p>
<h4><b>Harnessing Headwinds</b></h4>
<p>The path the industry has taken since 2008 has been influenced substantially by government policy changes and incentives. Most notably, the American Recovery and Reinvestment Act of 2009 (ARRA) provided extra impetus for smart metering and other distribution technology investments that companies otherwise might’ve put on the back burner. In addition, FERC incentive rates and remotely sited renewable energy development drove transmission investments. Renewed and enhanced federal tax credits spurred major investments in utility-scale wind and solar farms. New EPA regulations prompted major environmental upgrades and retrofits. And gas safety standards – prompted by tragic disasters at aging pipelines – sparked gas distribution investments. </p>
<p>As a consequence, investor-owned power and gas companies spent $400 billion on U.S. capital projects between 2008 and the end of 2012. Even more remarkably, throughout this period of heavy investment, despite the suffering economy and anemic energy markets, investor-owned utilities generally maintained positive cash flow, strong dividends, excellent credit metrics, and easy access to capital markets.</p>
<p>“The regulated utilities sector has actually done a little better than we’d originally projected in our financial models,” says James Hempstead, a senior vice president with Moody’s Investors Service. He cites tax benefits like bonus depreciation, as well as a stable regulatory environment. “Across the country, regulatory agencies have been very supportive for utility cost recovery, providing decisions on a timely basis and approving a series of trackers and rate riders for single-issue recovery mechanisms. We think that’s a good thing, because it provides a degree of transparency and timeliness to cost recovery.”</p>
<p>The same observations can’t, however, be applied to unregulated power companies, for whom low commodity prices and a flight to quality on Wall Street have resulted in a starvation diet. “Companies are hunkering down to protect liquidity,” Hempstead says. “They’re harvesting assets and squeaking out efficiencies to improve cash flows. It’s been a difficult market for the unregulated power sector.”</p>
<p>Indeed, several major independent power companies have gone through major financial distress in the past five years:</p>
<p>• AES Eastern Energy filed bankruptcy at the end of 2011. </p>
<p>• Bicent Holdings and 12 of its affiliates sought bankruptcy protection in April 2012. </p>
<p>• GenOn saw its share prices plunge from more than $25 in 2007 to less than $2 when NRG Energy agreed to acquire the company in July 2012. </p>
<p>• Dynegy filed Chapter 11 in July 2012. </p>
<p>• Edison Mission Energy filed bankruptcy in December 2012. </p>
<p>Today, with power prices remaining persistently low, the difficulty isn’t over for unregulated power companies. At this writing, analysts were predicting a November 1 bankruptcy filing for Energy Future Holdings subsidiary Texas Competitive Electric Holdings, which includes wholesale generator Luminant and retailer TXU Energy.</p>
<p>Some other unregulated power companies are selling off generating assets – sometimes despite weak market valuations – in an effort to buttress their balance sheets. Secondary market activity also is driven by strategic moves among unregulated generators and utilities, as well as the investment cycles of private equity funds and institutional investors seeking to capture what value they can from mature assets languishing in their portfolios. (<i>See Figure 3.</i>)</p>
<p>Further, some companies are exploring options for capturing higher valuation multiples from portfolios of similar assets – most notably through so-called “yieldco” (yield company) and master limited partnership (MLP) structures. In March, for example, OGE Energy, CenterPoint Energy, and ArcLight Partners agreed to form an MLP that will own OGE and CenterPoint’s interstate pipelines, midstream, and field services businesses, with the intent of raising equity through an initial public offering (IPO). And in July, NRG raised $462 million through the IPO of NRG Yield, an investment vehicle for several generating plants and development projects with long-term power purchase agreements. </p>
<p>To better understand how the industry has weathered the past five years – and how it’s positioned for the years to come – we spoke with several finance executives. </p>
<p>• Peter Kind, Energy Infrastructure Advocates</p>
<p>• Matt LeBlanc, JPMorgan Chase</p>
<p>• George Bilicic, Lazard</p>
<p>• David Nastro, Morgan Stanley</p>
<p>• Frank Napolitano, RBS Capital Markets</p>
<p>• James Hempstead, Ryan Wobbrock, Mike Haggerty, and Jeffrey Cassella, Moody’s</p>
<p>Their perspectives suggest America’s power and gas companies will continue to find a welcome reception on Wall Street – even as they face an increasingly complex future.</p>
<p><b>FORTNIGHTLY</b> It’s been five years since the financial crisis began. How has the power and gas industry weathered the crisis? What’s the general outlook for access to capital today?</p>
<p><b>Napolitano, RBC Capital Markets:</b> Five years after the start of the worst financial crisis in recent history, and the markets are as open as they were before, and even more open in terms of available capital products and investors for those products. </p>
<p>Last year we could’ve said IPOs were possible for contracted renewable companies, subject to market conditions and pricing. Since then we’ve seen successful IPOs of yieldcos. Most recently Pattern Energy announced its IPO. [The company planned to raise $320 million.] MLPs and yieldcos are a hot trend in power and gas financing. </p>
<p>In general capital markets are vibrant and healthy. Costs for issuing securities are better than they’ve been 95 percent of the time. It hasn’t felt this way since 2006, and the fundamentals are rational. It feels like the end of a five-year cycle of fear and distress.</p>
<p><b>Nastro, Morgan Stanley:</b> Year-to-date, we are very close to the 20-year record that was set for corporate debt issuance in 2007. Corporate boards are gaining confidence and are more comfortable borrowing money than they’ve been at any time since the financial crisis. </p>
<p>Historically, lower Treasury yields correlated with higher investment-grade credit spreads. But if you look at 2012 and 2013, markets dislocated from this trend and we’ve seen only a modest widening of spreads. The combination of historically low Treasury yields and relatively tight credit spreads has translated into historically attractive financing costs.</p>
<p>In the leveraged finance market, we’ve seen the technical underpinning improving, with the refinancing wave from 2010 to the present. Near-term maturities have either been refinanced or addressed through amend-and-extend transactions. The leveraged finance market continues to be healthy coming out of the crisis, and we expect to see further issuance with the expansion of European and international markets. </p>
<p>Coming out of the Eurozone banking crisis, the old project finance banking market is significantly weaker than it was. Bank downgrades and Basel III requirements have forced banks to shore up their capital levels. Fewer banks are providing capital and generally are lending only to core relationship clients, with higher fees and pricing. But as traditional project commercial lenders exit that market, the capital markets have been filling the void. Capital market investors have ample capacity and a desire for structured bonds. As investors continue searching for yield in a low interest-rate environment, they’re more interested in structured credits. </p>
<p><b>Bilicic, Lazard</b>: Utilities continue to provide a very attractive risk-adjusted total return proposition to shareholders, because of the dividends they offer and some reasonable growth that goes along with that dividend proposition. This has been particularly important in the volatile equity markets over the past few years, and has allowed utilities to offer a differentiated and useful investment proposition.</p>
<p>Going forward, the industry could start to cycle into a period with modestly increased earnings challenges driven by load-growth issues, rate pressures, and other factors. Some industry participants will be successful in addressing these earnings challenges and some might not. Further, while it is tiresome for industry participants to hear this observation, long-term interest rates eventually will begin rising, placing pressure on valuations and the need to show growth.</p>
<p>These potential negative trends could affect valuation levels, but if one views the historical access to capital for the utility industry and the depths of the relevant capital markets, it’s hard to see how capital markets access – as opposed to valuation levels – will be impaired in any material manner. </p>
<p><b>Haggerty, Moody’s:</b> The industry has been incredibly resilient. We remember the dour mood at the EEI Financial Conference in 2008, but the sector was still accessing the markets because there was a flight to quality.</p>
<p>Low gas prices and low interest rates have been big contributors to the credit quality of the sector. Interest rates might go up, but not quickly or immediately, and companies should be able to adapt. </p>
<p>Bonus depreciation has been helpful, and it’s kept metrics inflated a couple of percentage points higher than they’d normally be. As that comes off, it could put pressure on metrics and challenge companies’ ability to keep up capital spending without going in for a rate case. It’s not a game changer, but something management has to deal with going forward.</p>
<p><b>LeBlanc, JPMorgan Chase:</b> Sophisticated utilities with access to capital markets have turned their debt over to lock in low fixed coupon rates. As issuers, they’re focused on maintaining investment-grade ratings as a core commitment to regulators and customers. </p>
<p>We focus mostly on the project financing and structured financing market. With pressure on European banks and insurers related to regulatory capital adequacy, you have fewer players in that space. Some Canadian, Japanese, and U.S. banks are participating, but with fewer capital providers, you see spreads widenening.</p>
<p>We see a huge opportunity in the U.S. to deploy money in the energy and power value chain, especially midstream and closer to the demand side. We think it’s a $1 trillion investment opportunity over 10 years – and that’s all new money going in, not considering existing assets that might change hands. </p>
<p><b>FORTNIGHTLY</b> Utilities are facing pressure on both allowed returns on equity (ROE) in rate cases, and earned ROEs. How does pressure on ROEs affect utility financing and access to capital?</p>
<p><b>Kind, Energy Infrastructure Advocates:</b> Low interest rates have led to low ROEs, and that creates a competitive dynamic. As other states look to what’s being granted by neighboring states, it focuses attention on keeping rates reasonably low. </p>
<p>Earned ROEs are where the rubber meets the road, and they have lagged allowed ROEs. In a market where load growth is modest – or nil – investors are concerned about a company’s ability to earn its allowed ROE. Coverage ratios go lower, and that affects your credit metrics. It’s a cycle.</p>
<p><b>LeBlanc:</b> Regulators are saying ROEs should come down as financing costs come down. But that makes it difficult in a rising-rate environment, when you’re no longer competitive with other entities that are issuing debt. It will put utilities in a bind, if and when these things play out. </p>
<p><b>Napolitano: </b>Pressure on ROEs is coming in utility rate cases. We’ve seen a variety of regional outcomes. ROEs in the Southeast are generally higher than in other regions. The exercise for utilities now is to get what they need for reliability and green power investments, without accelerating costs onto bill payers. </p>
<p><b>Nastro:</b> We’re concerned that as interest rates start moving up, we might not see a commensurate rise in ROEs on a timely basis. </p>
<p>Because ROEs are facing downward pressure, utilities are reluctant to file general rate cases. They’re asking regulatory commissions to provide forward-looking recovery mechanisms to reduce lag, such as trackers that allow them to stay out of rate cases for longer and a focus on managing non-fuel O&amp;M costs. Investors likely will start differentiating utilities by regulatory compact. They’ll seek shelter in this rate storm with utilities in states like California and Illinois, where the ROE construct has some degree of interest rate protection.</p>
<p><b>FORTNIGHTLY</b> Several large mergers were completed in the last couple of years. Now only one major transaction is pending – MidAmerican Energy’s acquisition of NV Energy. What factors are affecting utilities today as they consider M&amp;A activity?</p>
<p><b>Nastro:</b> Buyers have been aggressive as they try to pry loose non-core regulated assets. For example, Laclede bought Missouri Gas [for $975 million, closing September 1], and TECO Energy is acquiring New Mexico Gas [for $950 million, closing expected in early 2014]. Those sales resulted in robust auctions with strategic and financial buyers lowering their hurdle rates as they actively look for new growth opportunities. Regulated utilities are also looking to take advantage of their strong currency and historically low financing costs to make things happen.</p>
<p>MidAmerican wasn’t alone in looking at the opportunity to acquire NV Energy. Other strategic buyers also looked at that business and were willing to reach geographically for new growth avenues. There are a limited number of contracted and regulated opportunities out there, and we’ve seen aggressive buyers and long lines in recent auction processes.</p>
<p><b>Kind:</b> Each transaction has its own rationale. The themes that have driven deals are management succession issues, the need for synergies to mitigate rate increases, or scale to support raising capital. I suspect that over the next several years, rate-case activity will be fairly active, and that might put a dent in the level of M&amp;A activity. It’s not typically conducive to seek merger approval while you’re processing a rate case. This might be less of a factor for the big companies that are always processing rate cases, but for smaller companies, the single-state utilities, it’s harder to do.</p>
<p>Also it’s fair to say that when deals are announced, the companies that aren’t involved will reassess the landscape. Companies don’t want to be left out if there are potential partners they want to pursue. They start asking questions, and that’s how a wave gets started. </p>
<p>For companies whose valuation is dependent on power prices, their stocks are being challenged, and they don’t have a strong currency right now to consider acquisitions. At some point they might consider strategic acquisitions to create scale. But in general low commodity prices aren’t helpful to the stock prices of merchant players, and they’re holding back, trying to figure out how to stabilize their profitability. </p>
<p><b>Bilicic:</b> M&amp;A activity ebbs and flows, but there is a consistent story across the industry – it’s consolidating slowly and steadily. At the moment there are something like 52 publicly traded electric utilities. Twenty years ago, there were 95 or 96. We expect consolidation to continue, because value can be created through M&amp;A that can materially exceed the stand-alone case. While some will move forward smoothly, others will struggle as a result of regulatory approval issues and questionable industrial logic. </p>
<p><b>LeBlanc:</b> It varies from one jurisdiction to another, but companies tend to view themselves as fully valued in the current stock market. Nobody wants to buy at the top of the market. </p>
<p>I think it will get harder for companies to merge. That creates an opportunity for private capital to come in. It won’t be a panacea but it can provide capital in partnering situations.</p>
<p><b>FORTNIGHTLY</b> We see a strong flow of asset deals lately. What’s driving that activity and how are asset M&amp;A trends and strategies evolving?</p>
<p><b>Kind:</b> To the extent you’re holding a merchant generation asset in a low power-price environment, your profitability has been affected. The asset market is pretty challenged. While power prices remain low, it will continue to be a buyer’s market. If a company will sell assets in this market, it’s not because they think they’ll get good proceeds, but because they need to reduce risk factors. Some distressed companies might need to sell assets to raise cash, or they’ll be taken over in bankruptcy and the new owners will sell those assets.</p>
<p><b>Napolitano:</b> Because the debt markets are wide open and available at all levels of credit quality, buyers can build a capital structure to acquire assets for cash. This is a point of progress. In 2008 there was no M&amp;A because there was no access to capital. In 2010 the market started to come back, and in 2011 and 2012 companies were more and more successful. Now in 2013, the buy side is well capitalized again, and the market is wide open, with buyers and sellers of everything – midstream, coal, gas, renewables, you name it. In my entire career, I’ve never seen more things for sale, of all types, in the U.S. power and utility asset space. </p>
<p>In some cases, the owners are private equity funds and they’ve reached the end of a hold period, and they need to cycle capital. In other cases, strategic investors are simplifying their business models. Ameren is an example; the company’s non-investment grade genco wasn’t creating shareholder value, so Ameren decided to exit the business. Some companies are bolstering a business that they consider to be their core, or entering one that seems to have better growth prospects. </p>
<p>When you have that kind of market, with many different participants, people start to aggregate assets around strategies: bringing a portfolio together and finding buyers; or seeking uplift through a public offering; or just operating the portfolio. There’s a belief in the market that valuations will improve from where they are today.</p>
<p>In that belief are the roots of recovery – and it’s happening in spite of the fact that demand for the underlying product isn’t going up. I think it’s healthy that participants are able to build a capital structure that works with the uncertainty.</p>
<p><b>Nastro:</b> The lack of organic growth is pushing management teams to look at strategic alternatives to provide upside for shareholders. Investors continue to reward transactions with a clear, coherent strategy, and a shift toward a more pure-play business model, with the ability to build scale and bring competitive advantages.</p>
<p>Several diversified utilities own merchant generation assets and their stocks are reflecting limited equity value for these businesses. There are advantages for power generation being held in a pure play, publicly traded merchant genco. If you think about how a merchant IPP is valued in the public markets, investors focus on EBITDA and cash flow, compared to earnings per share and capital structure for utilities. It’s a different valuation methodology, and IPP investors are comfortable with a company that’s non-investment grade. </p>
<p>Since the equity market trough in 2009, interest-rate sensitive stocks have outperformed in the context of a low rate environment. Investors have been searching for new yield-oriented products. NRG Yieldco, for example, demonstrated a compelling growth profile in addition to traditional yield. In some situations, renewables and contracted fossil assets can be more appropriately valued in a yieldco construct than they can in a traditional utility or IPP model. These structures can result in a lower cost of capital, which can facilitate growth opportunities. </p>
<p>Investors are looking for carve-out opportunities, and a yieldco is a new way to unlock value and raise new equity capital. Another example is OGE and CenterPoint putting together their midstream businesses and looking to take the joint venture public. </p>
<p><b>LeBlanc:</b> Companies are pursuing yieldcos because MLPs are too hard. It will take legislative action to get renewable resources to qualify for MLPs. That’s not going to happen, but people will spend a lot of time trying.</p>
<p>Asset owners are watching the NRG Yield and TransAlta Renewables yieldcos, and saying “me too.” There’s a backlog lining up to get to market. Some will be a good fit, and others will fall by the wayside. But there’s a limited window for these structures. As interest rates go up, yield vehicles will become less attractive.</p>
<p><b>FORTNIGHTLY</b> Utility capex spending has increased in the last couple of years, to a record high in 2012. Do you see these levels continuing? What’s the outlook for new projects, and what factors are at play?</p>
<p><b>Kind:</b> Bonus depreciation mitigated income tax payments for many utilities, and that helped support some capital programs. Looking at EEI data, I see utilities continuing to spend in excess of 2-times depreciation on new capital programs. At that level, utilities will have to raise capital as bonus depreciation ends. And that’s without a lot of new power plants probably being added. If you add substantial power plant activity – which frankly I don’t see happening in the near term – you’d have to dramatically increase the level required. </p>
<p>At what point do companies in a no-growth or low-growth environment think about deferring capex to mitigate the need for rate increases? We saw that happen in the 2007 and ’08 timeframe, with deferrals on capital programs. I don’t think anyone is suggesting demand growth will return at a robust level, as a function of the fact nobody is projecting the economy will grow at a robust level. The economists discuss growth in the 2- to 3-percent range. Further, the Energy Information Administration talks about de-linkage of GDP growth and electricity usage. They’re predicting electricity usage will grow at less than 1 percent per year, and that’s without assuming any substantial change in the way customers behave in the future.</p>
<p><b>Napolitano:</b> I would disagree that we aren’t seeing investment in new power plants. I’ve been involved in activity that indicates lots of people are thinking about natural gas as their transition fuel, and they’re constructing a lot of peaking plants, with combined-cycle projects in process and coming. New projects were finalized in California as a result of an RFP process three years ago, and are coming online now. They’re needed to deal with intermittency of renewables coming onto the grid. In Texas, Panda Power Funds has announced multiple merchant plants and has put together a capital structure to support development financing. In PJM, state contracts for new projects are going through a variety of legal challenges, but the [725-MW] CPV Shore plant in New Jersey recently reached financial closing. Five or six new gas-fired plants cleared in PJM forward auctions on the assumption they’ll get financed and constructed. Many people want to build new gas-fired plants in PJM to deal with capacity requirements.</p>
<p>On the rate-base side, Consumers Energy in Michigan recently announced plans to build a new [700-MW, $750 million] combined-cycle plant. Others are looking at projects too. All incremental baseload power capacity will come from combined-cycle gas turbine plants, in my opinion, whether in competitive wholesale markets or in rate bases. The people who sell this equipment are quite busy with projects right now.</p>
<p><b>Ryan Wobbrock, Moody’s:</b> In general capex is peaking this year and going into 2014 as companies complete the environmental investments they need to comply with EPA’s MATS rules, and to meet renewable portfolio standards for 2015 and 2020. The industry will be turning to an execution strategy, with companies finalizing their large expenditures and trying to catch up with operating costs to make it through to the next rate case.</p>
<p><b>Haggerty, Moody’s: </b>One of the wild cards is environmental capex. There’s a scenario where EPA will impose more onerous regulations going forward. That’s a longer-term issue.</p>
<p><b>Nastro:</b> A large amount of the capex is behind us, and many companies will be focused on an execution strategy in 2014 and 2015. Over the last couple of years, low gas prices and low interest rates have subsidized customer bills and made it easier for regulatory commissions to grant cost recovery with minimal effect on rates. I don’t see any major problems financing capex going forward, especially given the sector’s ability to finance through the financial downturn. However, the lack of top-line growth is obviously a headwind for the sector, as companies contemplate capex investments in the future.</p>
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Thu, 03 Oct 2013 13:42:26 +0000meacott16819 at http://www.fortnightly.com